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WeWork Execs Discuss Going Public, Path To Profitability And Adam Neumann

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Following is the unofficial transcript of a CNBC exclusive interview with WeWork CEO Sandeep Mathrani and WeWork Executive Chairman & CEO of Softbank Group International Marcelo Claure on CNBC’s “Squawk Box” (M-F, 6AM-9AM ET) today, Thursday, October 21st. Following is a link to video on CNBC.com:

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WeWork Execs Discuss Going Public, Path To Profitability And Adam Neumann

ANDREW ROSS SORKIN: Welcome back to “Squawk Box.” This morning, we're live at the New York Stock Exchange. We’re going to get right into our next big interview of the hour. You can hear the noise. WeWork is going public today on the New York Stock Exchange under the ticker symbol, “WE.” We're gonna, it's gonna be a long interview. We’re not going to be able to hear each other. It is a result of a SPAC transaction with BowX Acquisition Corp. It's also the culmination now of a year’s long process to reach the public markets and joining us right now live at the corner of Wall and Broad streets in lower Manhattan, WeWork’s CEO Sandeep Mathrani and Executive Chairman Marcelo Claure. Congratulations to you. This is one of the great turnaround stories. This was a company that, to be honest with you, I think a lot of people thought was going to be left for dead before you made your investment in it and then the pandemic and who would have thought that we'd be sitting here right now. For you Marcelo, having done Brightstar, Sprint, T-Mobile and now this, it’s quite something. But, but I'd ask you, when you made the investment in this company and life is relative, we're going to talk about the Softbank investment in a moment, do you think we would be here at this point this quickly?

MARCELO CLAURE: I mean that was always the plan when you make an investment, when there's a great vision, the great asset to be disrupted, the goal is to eventually have a public company. It was, we got here in a different road that we haven’t anticipated but we're here and we're here celebrating with all of our employees which is marvelous.

SORKIN: We're going to talk about that road in just a second but when he, he, he was the one who recruited you to take this job?

SANDEEP MATHRANI: It was a decoy. He asked me to be a board member on my first meeting. We met at Salesforce Tower in San Francisco and then the following week we actually met for dinner and he said, would you be CEO? Without hesitation I said yes.

SORKIN: Because why?

MATHRANI: You know, WeWork is an amazing brand and if someone gives you a super brand to turn around, you're gonna have to say yes. It was always in demand. It was flexible space was in demand, so revenue was never a problem. Occupancy was never a problem. We’ve had an upside-down cost structure. So, for me, you know, to turn around a, you know, a brand like WeWork, was it would be an honor. It would be—

SORKIN: The great irony of this story is actually that the pandemic might have actually accelerated your story and your growth. No?

MATHRANI: Absolutely, you know, the pandemic allowed two things to happen. One, it's all about flexibility. No one wants long-term leases. No one wants, everyone wants a turnkey project. That's one end. Second is we build the All Access card could never have happened if it wasn't for the pandemic where people, you know, the ultimate of flexibility come as you want, when you want. And the third is who would have thought that WeWork could actually sell software. You know, 18 months ago if you told me that WeWork could sell software, I would have said no but the pandemic allowed our core business which is to sell a desk, sell an office, sell a conference room, you know, we were able to take and white label what we do for a living so the pandemic changed the business for us and made it top of mind to every CEO, CHRO and CFO so absolutely.

SORKIN: Okay Marcelo, we talk about this as a turnaround story, but Softbank is in for about $16 billion. Today, that value is worth about $5 billion. Do you see a way back to break even?

CLAURE: We have to correct, we're not in that 16 billion. We're about $10 billion if you look at the equity contribution. The important thing is fair to say that two years ago, the value of WeWork was zero. The company was on the verge of bankruptcy, company had run out of cash and the fact that we've taken from zero to evaluation circa $8, $9 billion in two years is great. Now, the future is bright like Sandeep had said. I’m just going to give you one data that you realize the power of WeWork. Second quarter, WeWork is less than 1% of all of London commercial real estate office space. We amount it for 37% of the leases so, that tells you that the future is bright, that tells you that people want a flexible workspace. People are using our all access cards to go. I visited WeWorks in Brazil this week full of people just testing different WeWorks so we feel extremely good. We have a great plan with Sandeep. This is it just one step in the, in the WeWork journey so we feel good about it.

SORKIN: As you know, Masa Son has called this investment a mistake. Does he have a different view today?

CLAURE: I think Masa is very excited. I think it was a mistake in the way we executed investment. Now it's our job to make sure that this becomes another investment that generates the right return for Softbank and I feel extremely confident that we will achieve that.

SORKIN: Sandeep, explain to the, to the audience the path to profitability. Is the company that still hasn't, is still losing money but you think by 2022 it'll get there?

MATHRANI: For sure, you know, you got to appreciate this company as I mentioned earlier had growing revenue and growing occupancy and upside-down cost structure and what we did through the pandemic was to correct the cost structure, right size the company, cut about $1.9 billion of costs. So, what we did was we designed the cost structure that should we just get back to the revenues we had in Q2 of last year, okay which was $900 million, we would be profitable. So, this is not a situation where we haven't been there, we haven't been doing occupancy, and if you see what's happened, you know Q2, Q3, you know, and that was going into Q4, revenues growing 10% to 15%, you know, a quarter and, you know, occupancy we'll get to the levels we were at Q1, Q2 last year, you know, sometime early next year. So, we will be profitable and this is before we had the All Access product. The All Access product, we have 32,000 members, gives us over $100 million of revenue a year, and this is before we launched and commercialized our, you know, our workplace management product so we feel pretty comfortable that we'll get there next year.

SORKIN: Marcelo, we’ve talked about this as a drama, in fact, a, a rise, a fall and rise again story and one of the protagonists of the story is Adam Neumann who apparently this morning is throwing a bit of his own party, not here, but uptown a little bit. With some perspective now, how do you assess Adam and his role in all of this?

CLAURE: So, I mean let's talk about the back, you know, Adam deserves credit. He was the visionary. Adam came up with the idea, the Softbank investment idea and then the next chapter came to bring somebody like Sandeep who can basically execute an amazing turn around plan so everybody has an important role to play here. Adam Neumann going forward, he’s a shareholder. I believe he has rights to be a board observer and we welcome anybody who comes up with ideas. At the end, you know, Sandeep is running the company, Sandeep has been the captain of this ship and I couldn't be more grateful for what Sandeep has accomplished in such a short period of time. So, Adam is just another shareholder.

SORKIN: He owns about 10% of the company, and one of the questions that people have, even to this day, is what kind of leverage he had at the time that he made the transaction with you, to be able to keep that at a time when some people thought the company was as you said worth nothing.

CLAURE: The story has to be told, right. Adam, as you know, had super majority shares and if you could make the decision to go to JP Morgan or to come with SoftBank. So, at the end, for whatever reason, he had all the power and Adam made a very wise decision which is basically to trust Softbank that has invested several billions on him and he was ordered to pass the baton to give us the keys for us to continue the journey so, you know, going forward, it’s a publicly traded company, independent directors, independent CEO. We're going to continue with this journey that still has a lot, it’s a long story to tell. You've said this a story with drama. Sure, this is a story where a lot of people wrote documentaries that it was the end of WeWork. Well, this, the resistance, the persistence of these people is incredible and this company is here. It’s stronger than ever and no doubt that we're going to be celebrating many more milestones.

SORKIN: Becky's got a question for you back at HQ. Hopefully you can hear it over the din of all of your, your fans here.

BECKY QUICK: Sandeep, I just wanted to talk to you a little bit about the leases. Obviously, the pandemic changed and moved a lot over time and I think it caught everybody a little off guard about how some of your, your big company clients came in and wanted the flexibility of being able to have a WeWork space so that they could kind of move and bob and weave through the times of the pandemic. How long is your average lease at this point? I just wonder how things change again once we come out the other side of the pandemic and companies maybe are able to have a more concrete plan about what they anticipate and what they expect.

MATHRANI: So, you know, the, the enterprise clients actually the lease term went up during the pandemic so it's about 30 months. It’s almost two and a half years and if you think about our business in 2017, you know, where we had 90% of our leases month to month. Today only 10% are month to month and 90% have an average lease term of 15 months but the enterprise clients you were just referring to is 30 months. So, this resembles much more and I would say from a 10-year perspective in apartment business than it does of a dell business if you will, which is more short term. So, the lease terms are about two and a half years.

SORKIN: Can both of you speak to this sort of new future of work and the idea of hybrid work not just here in the United States but what you're seeing in other places around the world where cultures are different. We've talked about how in certain parts of the United States, a lot of people are already back to work or even never, never stopped going to work, and how that's impacting the business and how you think that will change over time.

MATHRANI: I mean, I think, you know, the future has been going through what’s flexibility and hybrid for the last 20 years. This is not new, it's like in the pandemic everything got accelerated. And if we think about pre pandemic, you know, at least in the United States and me, you know, people went to work 65% of the time. 35% they were on vacation, they work from home, they were traveling. And so, this whole thesis there it's gonna go from 65% or 50%. It's not a big difference in reality, and, and effectively people always did that. They always went for quiet work to a library or they stayed home or, or went to different places. It just got accelerated and so the thesis of, you know, the norm that seems to be heading is three days on, two days off from where you can work from anywhere, you know, it's actually great for us right so.

SORKIN: But are you a believer that longer term companies will actually demonstrably shrink their headquarters and that actually becomes a benefit to WeWork or do you think they keep their headquarters? I mean, we're seeing, we're seeing two very different things. Google, by the way, buying up an enormous amount of real estate even here in New York.

MATHRANI: I think it's industry related. Okay, I think if your industry is growing like the technology industry is growing, the FinTechs are growing, they're absorbing space from us at scale because they're growing that fast so their need for flexible space is they don't know how fast they're growing, okay, and they don't want to make a mistake. And on the flip, you have traditional companies who are downsizing because the industry was downsizing for the last 20 years. It’s not something unique and they again don't know what the utilization will be. So sort of uncertainty becomes certainty for us and I like to give this core relationship here, this comes from my retail backdrop more than anything else, you know, ecom was about 1% of retail sales in 2000 and 25% last year, and people think, you know, flex is going to be its own channel of distribution. It's about 2% today, going to 20% by 2030. So, I think flexibility will have its own channel of distribution.

SORKIN: We got some data that's crossing just so I just want to ask you because we spent some time together when you first took on this role and you talked about software, this as a tech company, if you will, in the same way that Adam talked about it but in a different way in many ways. You guys are now trying to also be in the SAS business and this goes to potentially how the market is going to value this company over the long term. How big a business can the software piece of this become?

CLAURE: It’s a good idea. So let’s start with, every, every disruptive business is affected that because tech is what enables this business when you've got to start booking a conference room or a room by the hour, by the day, by the month, that's basically utilizing technology to predict how many people are going to go to a building and so on. What we didn't come to realization is the demand for flex space is so large, enterprise customers are now setting up their businesses to be, to be a flexible workspace so they don't know how to do it so they don't do WeWork. We've been doing this for the last five years. We've had an amazing software and now we're starting to sell the software as a service in which we're starting to power a lot of the enterprise, a lot of the landlord. The growth in flexible workspace, commercial real estate, the largest asset class, what you’re going to see is 30% of the commercial office real estate is going to be flexible, so WeWork has a role whether it's our building, whether we're managing somebody else's building or we’re powering those buildings utilizing our software. So, software as a service will be a very important part of our business going forward, is a high profitability business and high repeat business.

SORKIN: I want to congratulate you on this milestone. We do look forward to following your progress and the stock itself. Sandeep and Marcelo, thank you guys.

CLAURE: Thank you.

MATHRANI: Thanks Andrew.